The Disastrous Incident in Taiwan’s Aviation Finance Sector

Far Eastern Air Transport was founded in 1957. In December 1997, it became a publicly traded company, and in 1998 it established the Far Eastern Air Transport Group, marking the peak of the company’s success. In 2000, Tsui Yung became the chairman of Far Eastern Air Transport. In May 2008, Far Eastern Air Transport faced a financial crisis and had to suspend operations. Its stock was delisted in October of the same year. After the Taipei District Prosecutor’s Office investigated the case, it accused Chairman Tsui Yung of embezzling company assets. Before the sentencing was finalized, Tsui Yung fled to the United States in 2009 and later committed suicide in 2015.

The illegal actions led to over NT$13 billion (around $400 million USD) in debt accumulating at Far Eastern Air Transport. Upon the board’s request, the Taipei District Court approved the company’s reorganization in April 2009. Under the active management of Chang Kang-wei, the chairman of Huafu Group, Far Eastern Air Transport was eventually revived. In April 2011, Taiwan’s Civil Aeronautics Administration approved the company’s resumption of operations. In October 2015, the Taipei District Court ruled that Far Eastern Air Transport’s reorganization was legally completed.

Since resuming operations in April 2011, after nearly 9 years of normal operation, in December 2019, the company’s spokesperson announced that due to operational difficulties, Far Eastern Air Transport would temporarily suspend flights. In January 2020, Taiwan’s Ministry of Transportation and Communications immediately revoked the company’s air transport business license. The Taipei District Prosecutor’s Office then launched an investigation.

In July 2020, the Taipei District Prosecutor’s Office issued an indictment, accusing Chang Kang-wei of crimes including reorganization fraud, misappropriation of Far Eastern Air Transport’s funds, leaving debts with the company, and breach of trust. Zhang was charged with 12 offenses under securities, company, and civil aviation laws. The prosecutors also indicted several Cooperative Bank directors for violating banking and securities laws in their dealings with Far Eastern Air Transport.

However, the financial crisis of Far Eastern Air Transport (FEAT) originated from the former chairman Mr. Tsui Yung. It was only through the intervention and restructuring led by Chairman Chang Kang-wei that FEAT was able to operate normally from 2011 to 2019. The operation of an airline, together with its upstream and downstream industrial value chain, safeguards the livelihoods of thousands of families. The question is, can the contributing Chairman Chang truly be considered an unpardonable villain?

Secondly, according to the indictment news release from the Taipei District Prosecutors Office, Cooperative Bank illegally lent NT$2.25 billion (around $70 million USD) to FEAT, with the collateral being the bad assets such as unfinished buildings owned by the Huafu Group. This resulted in losses for Cooperative Bank, and Chairman Chang Kang-wei was accused of misappropriating the borrowed funds. The above actions allegedly constituted violations of Article 171 of the Securities and Exchange Act by Chairman Chang, while the chairman of Cooperative Bank, Liao Tsan-chang, and relevant personnel were accused of being accomplices to the violations. During the public trial at the Taipei District Court, Cooperative Bank argued based on evidence that its lending was not illegal, for the following reasons: (1) Cooperative Bank had required collateral worth over NT$3 billion (around $100 million USD) from FEAT prior to the loan, which was not considered bad assets. (2) The loan interest rate set by Cooperative Bank was 3.25%, significantly higher than the industry standard of 2%. (3) After FEAT was unable to continue operations, Cooperative Bank was able to fully recover the loan amount through the auction of the collateral. (4) The Taipei District Prosecutors Office had previously requested Cooperative Bank and the Financial Supervisory Commission to conduct an audit report on this case, and the final result showed that the loan did not violate any regulations.

If the lending process was completely legal, and FEAT was not a publicly listed company at the time, then neither party would have criminal liability under the Securities and Exchange Act.

Finally, this case involves a wide range of aspects, and the defendants certainly all hope to be acquitted. We respect the legal authority of the Taipei District Prosecutors Office and believe in the fair trial of the Taipei District Court. However, our concern is that if the defendants, including Cooperative Bank, are found guilty of being accomplices to the violation of Article 171 of the Securities and Exchange Act, this precedent could make banks cautious about engaging in financing and lending activities in the future. If a borrowing company becomes involved in a criminal case, the bank itself could potentially be considered an accomplice. If this court ruling is established, it will severely impact all bank lending in Taiwan and affect the operation of the financial system and economic development.

(The Taipei District Court will announce the verdict in this case on September 30, 2024.) Amaryllis